Why ESG matters to your charity

The last two years have been tough for charities, with many severely disrupted during the worst of the COVID-19 pandemic. In fact, according to research carried out by the Charity Commission, the impacts have been wide ranging and almost universal across the sector - more than 90% of charities experienced some negative effects.¹

Impacts on services and delivery were the most common, affecting 85% of charities, while 72% reported a negative effect on their financial positions and 60% had to cope with reduced income. On top of that, 66% said COVID-19 hampered staffing and governance, a third (32%) reported a shortage of volunteers, and 62% are concerned at the risk to the charity’s financial viability in the next 12 months.¹

For many charities, therefore, the focus will be on recovery and stability. However, with 170,000 registered charities operating in the UK¹, competition for funding and volunteers may be tougher than usual – leaving many seeking new ways to attract support.

In that context, the ability to demonstrate sound environmental, social and governance (ESG) practices may prove to be vitally important.

What is ESG?

In simple terms, ESG is an evaluation of an organisation’s collective conscientiousness for environmental, social and governance factors. ESG is often reported as a score that expresses an organisation’s performance in, for instance, reducing its environmental impact, increasing diversity and inclusion (social), or demonstrating good governance in everything from executive pay to investment strategies.²

Why is ESG important?

Originally launched by the United Nations as a way to encourage more ethical investment practices, ESG is now widely recognised as a measure of an organisation’s focus on ethical, responsible operation.

What’s more, as social issues like diversity, inclusion, and the climate crisis have come to the fore, the influence of ESG has broadened. It is now essentially seen as a measure of an organisation’s willingness to ‘do the right thing’ – not just in terms of its purpose, but in how it operates and how well that day-to-day work aligns with its purpose.

Why ESG is important for charities

It is all too easy to think that by their very nature, charities don’t have to think about ESG, that they already have it covered. After all, a charity’s purpose – be it reducing waste or supporting disadvantaged children – is likely to align with wider ESG considerations.

However, as pointed out above, ESG is not just about an organisation’s goals – it is about what it does day-to-day as it strives to achieve them and how well the two align. So, for instance, a charity focused on waste reduction, but not understanding how their waste is managed in its supply chain.

Crucially these kinds of disconnects between what organisations say and what they do are under increased scrutiny and poor performance can have a real impact on everything from reputation to the ability to attract investment – or funding in the case of charities. In fact, there is evidence to suggest that charitable donors are paying more attention to how charities conduct their work, not just what they do.³

As a result, it seems likely that ESG practices could have a positive material impact on charitable fund-raising. Poor practices could harm charitable finances, but the ability to demonstrate strong performance could bring real benefits – and not just in terms of fund-raising.

The benefits of ESG for charities

The potential benefits of good ESG practice for charities are many and varied, but most flow from the fact that adopting an ESG strategy helps charities to better understand, articulate and deliver on their cause or purpose.

In turn, that alignment between purpose and delivery can have a number of positive impacts. These include making the charity more attractive to potential donors and volunteers, strengthening its reputation by removing conflicts between its goals and what it does, improving staff and volunteer morale and enhancing overall effectiveness by eliminating or reducing negative impacts from day-to-day operations.⁴

Charities and ESG: Challenges and getting started

For any charity, starting on a journey to improved ESG performance can be daunting, particularly at a time when funds are short – so, clearly, the potential cost of change can represent a barrier.

However, while it’s true that implementing an ESG strategy can demand investment, there are plenty of low-cost things charities can do to take steps in the right direction.

The first step is to understand current performance - looking at everything from carbon footprint and staff/volunteer diversity to trust fund investment strategies. The aim here is to identify areas ripe for improvement, with a particular focus on any issues that conflict with the charity’s purpose – for instance, an environmental charity might seek to adapt its investment approach to avoid stocks or funds linked to polluting industries.⁵

ESG is not just about investment strategies, however - there are a great many ways that charities can build ESG considerations into their practices, including:

• Minimising waste and energy use across operations – for instance, switching to a renewable energy supplier, recycling more, or converting to lower-energy LED lighting.
• Addressing governance areas such as recruitment - for instance taking steps to attract more diverse staff and volunteers.
• Integrating ESG considerations into products and services – for example, eliminating single-use plastics or making greater use of recyclable materials.
• Working with suppliers to encourage their own ESG efforts, or switching to more ethical, responsible suppliers where necessary.⁶

Help and support

As part of the financial services industry, insurers are increasingly looking to understand the ESG performance of their clients. Many insurers are using third-party data providers for ESG insights on their clients. As a result, charities should take ownership of their ESG story and proactively share it with their insurers.

At Marsh Commercial, we will soon be launching a free ESG assessment tool to help charities understand their current ESG performance and target improvements. In the meantime, for further information, help and support, contact our charity sector specialists.

^Sources: 

<sup>1. https://charitycommission.blog.gov.uk/2021/10/28/what-new-research-tells-us-about-the-impact-of-covid-19-on-charities/
2. https://en.wikipedia.org/wiki/Environmental,_social_and_corporate_governance
3. https://www.forbes.com/sites/timothyjmcclimon/2021/09/13/esg-is-good-for-nonprofits-too/?sh=e217db947723
4. https://litpark.ca/blog/spotlight-on-esg-in-non-profits/
5. https://www.cgi.org.uk/knowledge/research/esg-maturity-matrix-charities
6. https://www.linkedin.com/pulse/where-do-nonprofits-fit-esg-conversation-florence-tandy/</sup>